Small-cap funds grow six-fold in 5 years, Bandhan tops list with 30% return

Small-cap funds typically invest about 80% of their assets in small-cap stocks, while 8% is allocated to large-cap stocks, and 11% in mid-cap stocks. Among the small-cap stocks, about 50% of the investments are in companies ranked between 251st and 500th in terms of market capitalization, with 29% invested in companies ranked between 501st and 1000th. Only 2% of the funds are allocated to stocks ranked beyond the 1000th position, revealed a study by Ventura Securities. 

 

The study has been conducted by Juzer Gabajiwala, Director at Ventura Securities.

• LIC’s small cap fund has the highest allocation of 68% in the stocks that are ranked below 500 with 18% in stocks with market cap below Rs. 3,150 crores.
• Quant has the maximum allocation to Large Cap stocks.
• DSP and SBI are true-to-label, with more than 95% allocation to small cap stocks.
• In the last 5 years, November 2019 to November 2024, the AUM of the small cap mutual funds have grown 6 times at an average annual growth of 48%. 
• There are 29 mutual fund schemes with 23 being more than 3 years old. 
• In the past three years, only six new schemes were introduced in the small-cap category.

 

Key Findings: Top Performers and Trends

 

In the last five years, from November 2019 to November 2024, the Assets Under Management (AUM) of small-cap mutual funds have surged sixfold, growing at an average annual rate of 48%. This growth highlights the immense popularity of small-cap funds, with total inflows of Rs 1.03 lakh crore since FY 2019-20. Interestingly, thematic and sectoral funds have received the highest inflows, with Rs 2.27 lakh crore coming in, accounting for 27% of the total equity mutual fund inflows.

 

Some of the best-performing small-cap funds include Bandhan Small Cap Fund, which has posted an impressive 30% compounded annual growth rate (CAGR) over the last three years. However, these high returns come with a high level of risk, as indicated by the fund's high beta, a measure of volatility.

 

On the other hand, SBI Small Cap Fund offers a lower beta of 0.66, making it less volatile and potentially more stable, although this might mean lower returns compared to higher-risk funds. 

 

In the table above, the value of the stock that was ranked 251st in December 2019 has increased by 4x as of today. Similarly, that of the 500th company has grown 6x and the 1000th company has seen 8x growth. Thus, with the current market cap, the 500th company would have been classified as a midcap stock in December 2019. And the stock which is at 1000th place would have been at 414th place. Coincidentally, at present, the market cap of TTK Prestige today is 11,714 cr, (rank 498) and that of SMS Pharma is 2061 cr (rank 1201). Interestingly, despite a jump in their market cap, their ranks have gone down.

 

Small-Cap Stocks: Growth Beyond Expectations

The study also points out that small-cap stocks have experienced extraordinary growth in market capitalization over the past few years. For instance, the stock that ranked 251st in December 2019 has grown 4 times in value, and the 500th ranked stock has seen a growth of about 6 times. Even stocks ranked at 1000th position have grown by around 8 times. This indicates that some of the stocks in the small-cap segment are transitioning into mid-cap stocks due to their significant growth.

 

Interestingly, the 500th ranked stock in December 2019 would now be classified as a mid-cap stock, while the 1000th ranked stock has slipped in rank despite a significant jump in market cap. For instance, TTK Prestige, with a market capitalization of Rs 11,714 crore, is now ranked 498th, whereas SMS Pharma, valued at ₹2,061 crore, ranks 1201st.

 

The Risk-Reward Dynamic of Small-Cap Funds

Despite the volatility and risks, small-cap funds offer an attractive opportunity for long-term investors willing to embrace market fluctuations. Juzer Gabajiwala, Director at Ventura Securities, highlights that small-cap funds are still a largely untapped investment opportunity. He believes that these funds offer the potential to discover future market leaders early due to their ability to generate alpha (excess returns over the market).

 

However, Gabajiwala advises that investors should be patient and prepared for volatility. “To achieve high returns, it is essential to follow three key principles – embrace volatility, be patient, and maintain a longer holding period,” he states. Small-cap funds may not be for the faint-hearted, but those who can endure the ups and downs could reap significant rewards over time.

 

The Bottom Line

Out of the 23 small-cap schemes that are more than 3 years old, 22 have outperformed the Nifty 500 Total Return Index (TRI) in terms of CAGR over 1-year and 3-year timeframes. While small-cap funds are riskier due to their inherent volatility, their growth potential makes them a strong contender for investors seeking higher returns. 

 

Key Takeaways:

 

• Small-cap funds have grown sixfold in the last five years.
• These funds allocate up to 80% to small-cap stocks, with substantial exposure to companies ranked 251-1000.
• High-risk funds like Bandhan and Quant show potential for significant returns, while funds like SBI offer more stability.
• Investors should embrace volatility and have a long-term horizon to fully capitalize on the opportunities presented by small-cap funds.